Expanding your business means you need more capital, and if you don’t have the funds ready, you’ll probably want to take out a loan. Before you apply for a commercial construction loan, here are some things you may want to know.

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Commercial Construction Loans Explained

A commercial construction loan is a form of short-term financing that you can use to fund a construction project. You can use it to finance the construction, or even the renovation, of your commercial building. However, it does work differently from some other loans you might have heard of.

Basically, you will not receive the full amount of the loan upfront like you would with other loans. Instead, you will speak with your lender to determine when you receive the money on a schedule. 

As your project advances with each new stage, more funds get released. For example, you might get money to clear the land. Then money to pour the foundation and so on. Your lender will inspect the project with each step before they allot you the funds.

Why Take Out a Commercial Construction Loan?

Taking out a loan can be daunting, but there are good reasons to apply for one to help your business, especially if you don’t have the capital needed to pour into an expansion of your business. Ground-up constructions or renovations can be costly, often going into hundreds of thousands or even more. Most young businesses don’t readily have access to such an amount.

When you receive this loan, you don’t need to worry about paying interest on the entire loan right away at least. You will only pay for the amount that you have received. So, even if you think you’ll be borrowing $100,000 but have only received $50,000 now, you only need to pay interest on that first $50,000.

With this said, you can expect to pay an interest rate of anywhere between 4 and 12 percent of your current loan. The better credit scores you have, the lower the interest rate will be.

Extra Fees

You may also be paying some extra fees on your loan too. This might include guarantee, processing, documentation, project review, and fund control fees. You will also need to input a down payment to ensure that your lender feels comfortable continuing to work with you—since they’re funding most of the cost.

Ultimately, this will be around 10 to 30 percent of the total project cost that you will need to pay.

Commercial Mortgage

After you’ve borrowed all this money, what comes next? It’s worth knowing that you don’t need to repay everything right away.

You enter into a commercial mortgage, wherein your property serves as collateral and you begin to make monthly payments on your loan. This is just like paying rent or mortgage for your home until you pay back the whole amount.

How to Get a Commercial Construction Loan?

You’ve decided that you need a commercial construction loan. This means that you need to start by contacting a hard money lender or a traditional lender to discuss your project and financing.

Like with any other loan, you will need to submit a loan application for your lender to decide whether or not they will proceed with your project. Typically, they’ll look at the overall cost, projections, and background of the developers.

If they decide to approve the loan, you will receive a sheet with the terms of the loans that you need to read over and approve of before it’s returned to the lender to perform the underwriting process. It’s crucial to ensure that you have all the paperwork you need to complete this step as smoothly as possible because from here, you only need to agree on the terms and conditions before you receive the initial amount of your loan.

Conclusion

A commercial construction loan is a key part of any expansion project. This loan will help you build out your business more efficiently, but be sure to do your research and be aware of some of the fees and costs associated with it.